The inside bar is a distinctive and powerful candlestick pattern. Probably you have already read many articles and watch few videos about that topic. My intention is to avoid repeating everything that has been said before and teach
practical trading tips that will help one become a better inside bar candlestick pattern trader.
1/ Inside bar and volatility
To achieve consistent winning trades, one ought to work with financial markets principles.
The market principle that governs the inside bar trading states:
high volatility is often followed by a low volatility and a possible reversal.
In this case the first candlestick bar is a long range bar (high volatility), but the inside bar is an average or small range bar (low volatility) that is confined within the range of the first (volatile) candlestick bar.
Note this down.
When a low volatility day follows a long range or volatile candlestick bar anything is possible (price may break out bullishly or bearishly).
Now, one must highlight the high and low of both candlestick bars. On the third day, one will give priority to bullish trade signals above the range of the inside day bar and bearish signals below its range. It can be just a break above retest or break below retest setup. If one identifies a reliable trade setup one must implement a top-down trading method.
Inside Bar And Consolidation
There are two types of market.
There is a balanced market and imbalanced market.
A balanced market is a consolidating market either in the shape of a triangle, or normal consolidation between two horizontal key levels. A balanced market is also depicting a low volatility trading session.
Now try to substitute the long range bar with a price action from A to B.
And substitute the inside day bar with a balanced market (triangle, rectangle or consolidation).
Think of it like there was an initial price move from A to B then the price action takes a pause (low volatility). Though, one is not dealing anymore with just two candlestick bars, it is the same thing that is happening if one understands the basic principle that governs the inside bar pattern.
Truly, there are many variations of the inside bar trading setups. To quickly spot them, one must work with the related market principle and think outside the box (status quo of traditional inside bar trading).
Indeed, there is nothing complex that is happening here. In fact it is very simple. If a financial instrument rises or declines with a strong momentum and volatility, that phase is usually followed by a pause (low volatility).
In other words, an imbalanced market is followed by a balanced one and vice versa. Though, this is not a scientific formula, it is predictable phenomenon. Once one grasp exactly what is the real market principle that rules the inside bar trading, one can do greater things with the inside bar candlestick pattern in the financial markets.
One can even go deeper into the subject of the inside bar trading by explaining few Elliott wave principle rules. For example, the second wave should not erase the first wave. It means that it should stay within the range of the first wave (call it inside range instead of bar).
The fourth wave should not come into the range of the first wave. It means, one expects the 4th wave to be shallow and be a narrow correction therefore forming an inside range to the third Elliott wave.
As one can see, it is not all about the inside bar, one should also take into consideration the inside range.
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